Jiantao laminate (1888 HK; HK $8.45; target price: HK $9.47) profit margin restored
Strong growth in 2016
The share price of Jiantao laminate rose as much as 116.5% in 2016, significantly surpassing the Hang Seng China Enterprises Index (- 2.8%), mainly due to the recovery of the laminate business and the soaring price of copper foil, the key raw material the company produces for its own use and export, and higher dividends. Management released Yingxi last month and expects 2016 net profit to rise 50 per cent year-on-year by 60 per cent.
The price of laminate rebounded
The company ranks first in the global laminate market for 11 consecutive years, with a market share of 14% in 2015. Demand for laminates has fallen over the past few years as a result of the global economic slowdown, but now the recovery in mobile phone sales, electric cars and the Internet of things is driving demand, and continued industry consolidation has improved supply. The average selling price of laminates has rebounded since July 2016, with a cumulative growth of 40%, 50%, and substantial year-on-year profit growth is expected to continue in the first half of 2017.
Copper foil is the key raw material
Copper foil accounts for about 35% of the cost of the laminate. Due to the huge market for electric vehicles, the demand for copper foil, the raw material of lithium battery negative electrode, has also increased rapidly, and has exceeded the growth of copper foil production capacity. Some manufacturers are converting the capacity of PCB copper foil to that of battery copper foil. Due to the shortage of supply, some laminate manufacturers are unable to buy copper foil and unable to produce, which leads to a decline in capacity utilization and pushes up the price of high-level laminates.
There is room for dividend promotion.
Management expects strong earnings growth to continue in the first half of 2017. In addition, the company used to distribute 44% of profits as dividends, while 48% of profits in the first half of 2016 as interim dividends (31% in the first half of 2015), plus special dividends (179% in the first half of 2016). Management believes that improving profitability and strong cash flow will provide room for an increase in dividends (to 50% or more of profits). Investors are advised to pay attention.